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There is a sudden burst of optimism about the global economy but any real recovery is still contingent on a host of unlikely factors

There is an unseasonable as well as an unreasonable burst of confidence in the financial markets. Junk bonds are in great demand, and equity markets have crossed their previous best level in many cases. There is talk of the global economy having turned the corner. No one is talking yet about the ‘green shoots of recovery’ as Norman Lamont claimed prematurely in his days as the British Chancellor of the Exchequer. But there is a feeling that the worst is over. At Davos, they are experiencing much joy.

What is going on? Are we just tired of feeling miserable and have collectively decided to cheer ourselves up? Or is it that finally after two years plus of QE stuffing money down our throats, there is now a tendency to gamble that any piece of paper that offers more than the near-zero yield is better than nothing? The eurozone countries are saying that the worst is past; the euro did not collapse and there was no Grexit. Ireland is even talking about moderate growth and is past its worst financial state. Spain has not recovered but it didn’t collapse nor did it have to resort to ECB’s emergency help. Portugal has just floated some debt for which it has paid under 5%. Italy is facing its election with some equanimity that whichever way it goes, Monti may be back as Prime Minister at the head of some coalition.

The uncertainty, if there is any, is with the stronger Northern eurozone economies. The most recent regional election in Germany has seen a defeat for Angela Merkel’s CDU and their Free Democrats partners. A Left-Green government will take power. As the federal elections take place later this year, it may yet be that the SPD-Green combination may defeat Merkel. In that case, we may have a slightly more reflationary policy than before but only very marginally so. The major effect will be on the longer running project of creating a fiscal union in the eurozone. The Left may agree more with François Hollande about the need for growth. The ECB will not like this and may not relax policy. It will add uncertainty to the resolution of the eurozone integration timetable.